Yield Is Not Fixed: Why Your Return Changes Over Time

One of the most common misconceptions in property investing is that once you've calculated your yield, that number stays the same as long as the tenant stays in place. The reality is that your investment's performance is constantly shifting.

Yield on Cost vs. Yield on Equity

When you first buy a property, you calculate your return based on the purchase price. If you bought for £200,000 and it nets £10,000, that’s a 5% Yield on Cost.

Five years later, that property might be worth £250,000. If it still nets £10,000, your Yield on Current Value has dropped to 4%. More importantly, if you have £100,000 of equity tied up in it, your return on that equity is 10%. If house prices double and you now have £200,000 of equity, your return on equity has halved to 5%.

The "Lazy Equity" Trap

As property values rise, your Return on Equity (ROE) often falls. This is known as "Lazy Equity"—money that is sitting in a property but not working particularly hard for you. At a certain point, it may be more profitable to remortgage and use that equity to buy another asset, or even sell and move into a higher-yielding property type.

What Changes Your Yield?

• Rent Escalation: If rent stays flat while inflation rises, your real yield is shrinking.
• Maintenance Creep: As buildings age, the cost to maintain them generally increases.
• Tax Changes: Recent changes to mortgage interest relief (Section 24) have significantly reduced net yields for many UK landlords.

Summary

A smart investor reviews their portfolio's ROE at least once a year. Your goal isn't just to own property; it's to ensure the capital you've invested is delivering the best possible return relative to the risk you're taking.